MB0051-Unit-12-Companies Act, 1956

Unit-12-Companies Act, 1956 Structure: 12.1 Introduction Objectives 12.2 Formation of a Company Promotion Registration (Secs.12 and 33) Availability of name Floatation 12.3 Memorandum of Association Meaning and purpose Form and contents Alteration of memorandum 12.4 Articles of Association Meaning and purpose Registration of articles Subject matter of articles 12.5 Prospectus Contents of a prospectus Stock Exchange Board of India guidelines relating to disclosure on prospectus 12.6 Shares Classes of shares Preference share Equity share Cumulative Convertible Preference Shares (CCPs) Deferred or founders shares

Non-voting shares Sweat equity shares 12.7 Directors 12.8 General Meetings and Proceedings Need for meetings Statutory meeting (Sec.165) Annual General Meeting (AGM) (Secs.166-168) Extra-ordinary Meeting (EGM) Sec.169 12.9 Auditor 12.10 Winding up of Companies Modes of winding up Winding up by the court 12.11 Summary 12.12 Terminal Questions 12.13 Answers 12.1 Introduction In the earlier units, you came to know about the Foreign Exchange Management Act. In this unit you will study about the Companies Act, 1956. The Companies Act, 1956 defines the word company as a company formed and registered under the Act or an existing company formed and registered under any of the previous company laws (Sec.3). This definition does not bring out the meaning and nature of the company into a clear perspective. Also Sec.12 permits the formation of different types of companies. These may be (i) companies limited by shares, (ii) companies limited by guarantee and (iii) unlimited companies. The vast majority of companies in India are with limited liability by shares. Objectives After studying this unit, you should be able to: l Describe formation of company l Define shares and directors l Explain meetings and resolutions l Define auditor

l Describe how to winding-up a company 12.2 Formation of a Company The whole process of formation of a company may be roughly divided, for convenience, into three parts. These are: (i) Promotion; (ii) Registration and (iii) Floatation. 12.2.1 Promotion Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. The promoter may be an individual, syndicate, association, partnership or company. Who is a promoter? This term has not been defined under the Act, although the term is used expressly in Secs.62, 69, 76, 478 and 519. 12.2.2 Registration (Secs.12 and 33) Secs.12 states that, any seven or more persons or where the company to be formed will be a private company, two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration form an incorporated company, with or without limited liability. 12.2.3 Availability of name Sec.20 states that a company cannot be registered by a name, which in the opinion of the Central Government is undesirable. Therefore, it is advisable that promoters find out the availability of the proposed name of the company from the Registrar of Companies. For the purpose, three names in order of priority should be filed. The following two documents, though not required to be filed for the purpose of registration, are usually delivered along with the aforesaid documents. (i) The address of the registered office of the company (Sec.146). (ii) Particulars regarding directors, manager and secretary, if any (Sec.303). These two documents are required to be submitted within thirty days of registration of the company. 12.2.4 Floatation When a company has been registered and has received its certificate of incorporation, it is ready for floatation, that is to say, it can go ahead with raising capital sufficient to commence business and to carry it on satisfactorily. Sec.70 makes it obligatory for every public company to take either of the following two steps: (i) Issue a prospectus in case public is to be invited to subscribe to its capital, or (ii) Submit a statement in lieu of prospectus in case capital has been arranged privately. It must be done at least 3 days before allotment. Self Assessment Questions 1. The persons who assume the task of promotion is known as __________ (a) Acceptors (b) Motivators

(c) Promoters (d) None 2. How may partners involved in the case of private company? (a) 2 (b) 4 (c) 5 (d) 7 12.3 Memorandum of Association 12.3.1 Meaning and purpose The Memorandum of Association of a company is its charter which contains the fundamental conditions upon which alone the company can be incorporated. It tells us the objects of the companys formation and the utmost possible scope of its operations beyond which its actions cannot go. Thus, it defines as well as confines the powers of the company. If anything is done beyond these powers, that will be ultra vires (beyond powers of) the company and so void. The memorandum serves a two-fold purpose. It enables shareholders, creditors and all those who deal with the company to know what its powers are and what is the range of its activities. Thus, the intending shareholder can find out the field in, or the purpose for which his money is going to be used by the company and what risk he is taking in making the investment. Also, any one dealing with the company, say, a supplier of goods or money, will know whether the transaction he intends to make with the company is within the objects of the company and not ultra virus its objects. 12.3.2 Form and contents Sec.14 requires that the memorandum of a company shall be in such one of the Forms in Tables B, C, D and E in Schedule I to the Act, as may be applicable in the case of the company, or in Forms as near thereto as circumstances admit. Sec.15 requires the memorandum to be printed, divided into paragraphs, numbered consecutively and signed by at least seven persons (two in the case of a private company) in the presence of at least one witness, who will attest the signature. Each of the members must take at least one share and write opposite his name the number of shares he takes. Sec.13 requires the memorandum of a limited company to contain: (i) the name of the company, with limited as the last word of the name in the case of a public company and private limited as the last words in the case of a private company; (ii) the name of the State, in which the registered officer of the company is to be situated; (iii) the objects of the company, stating separately Main objects and other objects; (iv) the declaration that the liability of the members is limited; and (v) the amount of the authorised share capital, divided into shares of fixed amounts. These contents of the memorandum are called compulsory clauses and are explained below: The name clause. The promoters are free to choose any suitable name for the company provided:

(a) the last word in the name of the company, if limited by shares or guarantee is limited unless the company is registered under Sec.25 as an association not for profit [Sec.13(1) (a) & Sec.25]. (b) In the opinion of the Central Government, the name chosen is not undesirable [Sec.20(1)]. Too similar name. In case of too similar names, the resemblance between the two names must be such as to be calculated to deceive. A name shall be said to be calculated to deceive